Microsatellite expansions cause a number of dominantly-inherited neurological diseases. Expansions in coding-regions cause protein gain-of-function effects, while non-coding expansions produce toxic RNAs that alter RNA splicing activities of MBNL and CELF proteins. Bi-directional expression of the spinocerebellar ataxia type 8 (SCA8) CTG CAG expansion produces CUG expansion RNAs (CUG^exp) from the ATXN8OS gene and a nearly pure polyglutamine expansion protein encoded by ATXN8 CAG^exp transcripts expressed in the opposite direction. Here, we present three lines of evidence that RNA gain-of-function plays a significant role in SCA8: 1) CUG^exp transcripts accumulate as ribonuclear inclusions that co-localize with MBNL1 in selected neurons in the brain; 2) loss of Mbnl1 enhances motor deficits in SCA8 mice; 3) SCA8 CUG^exp transcripts trigger splicing changes and increased expression of the CUGBP1-MBNL1 regulated CNS target, GABA-A transporter 4 (GAT4/Gabt4). In vivo optical imaging studies in SCA8 mice confirm that Gabt4 upregulation is associated with the predicted loss of GABAergic inhibition within the granular cell layer. These data demonstrate that CUG^exp transcripts dysregulate MBNL/CELF regulated pathways in the brain and provide mechanistic insight into the CNS effects of other CUG^exp disorders. Moreover, our demonstration that relatively short CUG^exp transcripts cause RNA gain-of-function effects and the growing number of antisense transcripts recently reported in mammalian genomes suggest unrecognized toxic RNAs contribute to the pathophysiology of polyglutamine CAG CTG disorders.